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Regis to Offload Hair Club - Analyst Blog

Regis Corporation
(
RGS
) recently inked a deal with Tokyo, Japan-based Aderans Co., Ltd.
to sell one of its subsidiaries Hair Club. The deal follows the
divesture of Regis' minority ownership interest in Provalliance -
the largest hair salon company in Europe -in April this year. Both
decisions reflect the leading global hair care company's efforts to
turn around from continued underperformance by departing non-core
assets and solely focusing on enhancing salon experience.

Per the deal, Minneapolis-based Regis will receive $163.5 million
in cash from Aderans, which is a worldwide provider of hair
replacement and restoration products and services housing several
internationally acknowledged brands. The divesture is expected to
be completed by the third or fourth quarter of calendar 2012. Regis
will likely record a post-tax gain of $8-12 million from the deal.

Regis operates hair restoration centers under the trade name Hair
Club for Men and Women. There are nearly 98 North American Hair
Club locations, including 29 franchise units. Regis got hold of
Hair Club in December 2004. The subsidiary offers solutions for
hair loss ailments and holds around 5% share in the $4 billion U.S.
market. The business is susceptible to prudent marketing
strategies. During the three months ended December 31, 2011 Regis
considered evaluation of its non-core assets and even the possible
vending of this hair restoration business.

Regis, which owns various consumer segments like Supercuts,
MasterCuts, Regis salons and SmartStyle, has been reeling under
pressure for quite sometime. Weak salon traffic due to changes in
lifestyle patterns and economic uncertainty has resulted in 14
straight quarters of negative same-store sales (comps) as Regis has
already announced a 3.0% fall in comps for the upcoming fourth
quarter of fiscal 2012. The rate of decline is steeper than the
year-ago drop of 1.7% but less than the previous quarter's decrease
of 3.4%. Customers continue to elongate the time between salon
visits due to faltering consumer confidence.

Responding to the above difficulties, Regis, which competes with
Ulta Salon, Cosmetics & Fragrance Inc.
(
ULTA
) decided to concentrate on its core North American salon business.
Management remains committed to restructuring and cost-containment
efforts. In 2011, Regis revealed its intention to slash costs by
$40 million to $50 million over the next two fiscal years. Regis
also remains steadfast in shutting down underperforming stores.

We view the deal as strategically positive for both parties as it
gives Regis with an immediate cash value as well as an option to
divest one of its non-core businesses. On the other hand, Japanese
Aderans will cater to Regis' strong U.S. market share and
strengthen its global business. Regis currently retains a Zacks #3
Rank that translates into a short-term Hold rating.

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